Let's be clear what that really means. In effect it means that the Bank of England buys in £75 billion of government debt and takes it off bank and financial institution's balance sheets and puts it on its own.

At the same time of course the Treasury is issuing new debt to the same institutions because we're running a deficit.

Over the four months or so over which the QE programme will run the amount of debt issued will be a bit less than the amount of debt bought in. So what the heck you might think is the point of this?

Good question. There are three reasons for the policy.

First the old debt bought in is at high interest rates. The new debt is issued at low interest rates. That might sound like a saving. But for the banks that sell the debt back to the government it's better than that. The debt they sell back to the bank of England will result in a profit to them. Why? Well because the nominal interest rate on the debt sold to the Bank of England is higher than current gilt rates the price of that debt is inflated at present compared to the price at which it was originally issued to bring the real rate on the current price down to current rates. The consequence? Simply that selling this debt to the Bank of England delivers profit - and possibly quite a lot of profit - to the banks and finical institutions in question. You can imagine the result. It's bonus time this Christmas in the City thanks to HM Treasury.

But what else happens? Two things. First QE succeeds in effect in supplying finance to banks at Bank of England base rate -so 0.5%. But the banks then in effect lend that money on to the Treasury at more than 3%. So hey presto, there's another immediate source of profit to banks. More triple all round. And that is because the EU will not let the Bank of England lend straight to the Treasury that would cut out this margin for the banks. This rule, created when a failed banking system was not imagined. It's time it went.

And what happens with all this extra cash the banks get? The hope was they would lend it on. but they didn't of course. Far from it. Doing something so boring as providing banking services does not now occur to these organisations when it is so much easier to speculate, which is precisely what they do.

Last time they speculated in oil, commodities such as raw materials and food, forcing up prices in all of these because of the wall of money that was suddenly made available to speculate in these goods. We got inflation as a result. And this time because the Bank of England is really worried inflation rates will fall dramatically in the New Year because last year's VAT rise will fall out of the system as will the effect of the first round of QE they really want to push prices up - and that probably explains why the amount of QE is bigger than expected. But that inflation is of course created by profits to banks. Real people will see their pay frozen, and that means this inflation suppresses real incomes, rapidly, unless you are a banker of course. So that's another cause of celebration for the City. Nothing pleases them more than Ian increase in inequality in the UK and that is what we are going to get.

So what are the alternatives.

First, we should just get on with lending from the Bank of England to the Treasury and let the EU sue us in seven years time. This is a crisis. Maybe they should notice that.

Second, because banks will not lend this money into the economy the Bank of England should. since it hasn't got a mechanism to do that it should buy out the small rump of RBS it does not own and use RBS for the purpose as a new National Investment Bank.

Third the most odious public debt - PFI debt - should be repurchased in preference to gilts. Let's get rid of this odious debt for good and free future generations form real obligations.

Finally, let's also simply spend the money into the system - by VAT cuts, giving pension increases, buy cancelling redundancies. This has real prospect of saving us from the mess.

But I'm afraid to say that this time QE looks like it is a policy made by bankers for the benefit of bankers. And that is the last thing we need right now.

8 Responses

When you say it’s a crisis it’s actually not, not universally. It’s a crisis for most of us, the 99%, but not for the other 1%. For them it’s a balmy environment which literally puts more money in the bank. They don’t want this to end and neither will their hand-maidens Cameron and Osborne. We can’t look to government for solutions here I’m afraid.

” And that is because the EU will not let the Bank of England lend straight to the Treasury that would cut out this margin for the banks.”

Probably pure semantics, but surely this money will be effectively created, not lent? I’m a big advocate of debt-free, govenment-created money. It’s about time government’s saw sense and stopped effectively handing hundreds of billions of pounds every year to the banks to lend money from them when the government could create this money for nothing.

What amazes me is how ineffectual people like Sir Mervyn King are… according to Sky via BBC, his latest gem is “This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever.”…no sh*t – try telling that to the people who are struggling to make ends meet on a daily basis.

Am I naive to think that it would’ve been better to take the £75 billion and divide it out to every taxpayer in the UK earning under, say, £100,000 p.a. This would’ve put money back into the economy where it’s needed – in the hands of the consumer – and keep the flow of money moving – debts being paid off, Christmas presents and holidays paid for, etc. etc.
I’m not an economist nor do I have a degree so maybe I don’t understand the ramifications or practicalities of such a move.

IMHO, this isn’t just a financial crisis, it’s a human one and this seems to be something that banks, BoE, HMG are ignoring, for whatever reason. On that basis, maybe the solution has to come from outside the very small and limited world of finance. Any thoughts?

It would make more sense to give it to deserving businesses who want to expand to fulfil overseas orders or just plain survive. They’ll pass the money along to their workforce so it’ll reach the man in the street that way and be far more productive than a straight handout.
Giving it straight to pensioners is appeaing but if we go that way we should go all the way and reintroduce the idea of universal social credit. This is an idea lately out of favour but I suspect it’ll be becoming fashionable again soon as we seek more solutions. The late champion of the idea was Major CH Douglas and you can read more of him here http://douglassocialcredit.com/douglas.php

I like your idea, but I can see the stumbling block being the definition of a deserving business. I’m sure every bank would argue their case even louder than the struggling local bookshop or off-license.

Again, possibly a over-simplistic view of the world, but my personal experience (having worked in business for 25 years) is that, for a change to be effective and, more importantly, to be bought into by the populace/workforce/etc., it needs to provide something to the “bottom” and work up, rather than trickle down from the “top”.
The original NHS did exactly that. Unfortunately (IMHO) so did Mrs Thatcher with right-to-buy, but the important point is that ordinary people saw a tangible benefit and bought into the concept.
Perhaps the word I’m looking for is empowerment. I also suspect I’m only a small step away from shouting “Freedom for Tooting”, sorry.

BTW, thanks very much for the links…I’m afraid my education lacks in certain areas, but I’m learning!

As is often the case, Richard, you make a range of policy prescriptions that are imminently doable, and would be highly effective at tackling the underlying problems that impact the vast majority of the people of the UK. You also provide and excellent summary of why this kind of innovative thinking will be ignored: it doesn’t benefit the powerful elites who effectively control policy making in this country.

What we are presented with instead is King on Channel 4 News last night, expressing his deep concern for pensioners and savers, and other ordinary mortals, while actually being fully aware that on the evidence of the last round of QE it had virtually no impact on the underlying economic problems of the UK, but is, in concert with the government’s Plan A, rapidly creating a whole range of social problems (witness the reports from arange of charities about the rapid and steep rise in the numbers of food parcels they are supplying).

Still, I dare say King’s knowledge that such things exist is about as developed as Cameron’s complete lack of awareness of the fact that the consumption of the vast majority of the population of the UK was/is to a signifcant degree paid for using credit. Hence his absurd inability to understand why paying off all that credit might actually be a bad for the economy but is, for many people, an impossibility anyway. Why would we expect a wealthy man to understand such things.

Richard, as you rightly state above, the Treasury is barred from benefiting directly from quantitative easing without the action incurring interest at about 3% during its processing through the private banks. I have been advised by Ellen Hodgson-Brown, chairman of Public Banking Institute, USA, that in their similar process involving QE, The Fed is able to rebate this interest to the US Treasury, after deducting processing expenses.

I have asked Positive Money to investigate how this may apply to BoE. On the face of it, the US economy should have a very considerable advantage over the EU here.

The ConDems say that they have to force austerity on us otherwise the bond vigilantes will get us (a la Greece). They are now endorsing QE2, the main objective of which is to reduce bond rates. So who’s telling porkie pies?